Emerging market economies: China

Overview of the Chinese economy

China is one of the largest economies in the world, second only to the United States – as of 2018, it had a gross domestic product (GDP) of $14,092.514 billion.¹

Despite its size, China’s economy still has plenty of room to grow before it is officially considered a developed economy. Morgan Stanley Capital International (MSCI), for example, officially lists China as an emerging market (EM) economy because it has a low GDP per capita. China reported a GDP per capita figure of $8827 in November 2018, which is remarkably low compared to the US’s $59,531.¹

However, China’s reputation as an EM could change soon, as many foreign policymakers are starting to consider it as a developed market due to its growth rate and increasing global influence.

What are the biggest industries in China?

The dominant industries that have propelled China’s GDP growth are:

• The services industry, which employs the largest portion of China’s population, roughly 36%, and contributes 46% of its GDP.² The growth of the services market has led to healthy domestic consumption rates and GDP per capita increases
• The manufacturing industry, which makes up about 44% of China’s GDP and employs 30% of the population. China exports more goods than any other country in the world, including commodities such as iron and aluminium, as well as products such as electronics and aircraft
• The agricultural industry, which was China’s largest industry prior to the rise of the services industry. As of 2018, however, it was only responsible for around 10% of China’s GDP.² Most of China’s agricultural output goes toward filling domestic demand but it also exports soft commodities such as rice, wheat, corn and soybeans

Although these industries contribute the largest amount to China’s GDP, there are a variety of other up-and-coming industries that could be of interest to investors and traders. These include biotechnology, information technology and alternative energy.

History of the Chinese economy

The People’s Republic of China was founded in 1949, following the Chinese communist revolution and demise of the Nationalist Party. Although Chinese financial markets were closed after the revolution, the following two decades saw a lot of growth as the industrialisation of the country was prioritised.

From the 1970s, China gradually reformed its economy from a closed economic system, based on agriculture, to one that was more market-orientated. Crucially, in the 1980s, foreign capital was allowed to enter China when the stock exchanges were reopened – this saw the country’s annual GDP growth rate reach a high of 15.2%.³ For the next 30 years, China had the fastest growing economy in the world, averaging an annual growth rate of 9.9%.¹

But in 2015 it began to experience a significant economic slowdown due to a rise in the state sector and mounting financial risk. The uncertainty started after regulators implemented a ‘circuit-breaker mechanism’, which was designed to stop the stock market freefalling – but the decision caused mass panic and had more of a negative impact than a positive one. Global shares fell sharply on 7 January 2016, with Dow Jones opening 1% lower than the previous day and the FTSE 100 trading 2% down.

Investors and traders around the world started to worry about the slowdown in China’s GDP as the country only grew at a year-over-year rate of 6.5% in the third quarter (Q3) of 2018 – the country’s slowest rate since 2009. The slowdown came amid growing fears of the China-US trade war, in which both US President Donald Trump and China’s President Xi Jinping have levied tariffs against each other’s exports.

Future of the Chinese economy

The growth rate of China is still much faster compared with anything in the developed world, but the knock-on effects from the 2008 global financial crash are continuing to impact the demand for commodities.

The impact of these low commodity prices and recent trade tensions have negatively impacted market sentiment surrounding China’s economic outlook.

But the country still has a predicted growth rate of 6.2% for 2019,³ largely due to the government’s ‘Made in China 2025’ plan. The proposal aims to enhance innovation and production efficiency through the use of technology, big data and electronic vehicles (EV) – through which China hopes to change the perception of its manufacturing industry from one of cheap, mass production to one of quality.

How to trade the Chinese economy

Although there is no direct way to trade the Chinese economy as a whole, there are a variety of ways that individuals can gain exposure to Chinese assets.

The most common way is by using financial derivatives – including CFDs. These enable you to take a long or a short position on a range of markets, such as the Chinese currency and stock market, so that you can trade periods of growth as well as economic slowdowns.

How to trade the Chinese yuan

The currency of China is the renminbi (RMB) or ‘people’s currency’. While renminbi is the official name, it is commonly known as the yuan, which is a single unit of the currency.

It was pegged to the US dollar from 1994 to 2005, at which point it was allowed to trade against a basket of major currencies. The People’s Bank of China (PBoC) have the intention of making it a completely free-floating currency in the near future.

Supposedly, a lot of China’s growth stems from its monetary policies, which have kept the yuan undervalued against the dollar and other currencies. This led to allegations that the Chinese government was manipulating foreign exchange markets, by devaluing its currency, in an attempt to keep exports cheap and make the economy more competitive.

The yuan is commonly traded alongside major currencies such as the US dollar (USD/CNH), the British pound (GBP/CNH) and the Australian dollar (AUD/CNH). If you thought that the Chinese economy was entering a period of growth, you would sell these currency pairs, believing that the yuan would rise against the other currencies. Whereas if you were more pessimistic about China’s growth, you might choose to buy these currency pairs with the expectation that they will increase in value.

How to trade the Chinese stock market

Traders can also gain exposure to the growth of China by speculating on the shares of Chinese companies, which are listed on the three stock exchanges in the People’s Republic of China.

The Shanghai and Shenzhen exchanges were opened in 1990 as a way of helping modernise the economy, while the Hong Kong exchange was integrated later as the derivatives market. Traders can gain exposure to the performance of the top 300 companies across the Shanghai and Shenzhen exchanges with the China 300 Index.

The Shanghai stock exchange is the largest by market capitalisation, and is where the bigger, state-owned companies are traded – including the Bank of China, PetroChina and China Life. The Shenzhen exchange trades privately-owned companies including tech firms such as Tencent Holdings and ZTE Corp.

An alternative way of trading China’s EM economy is through the MSCI Emerging Market Index – an index that captures large and mid-cap companies across 24 emerging markets. Chinese companies make up just over a third of the index, which means that China’s economy holds significant sway over its strength.

Not only does the health of the Chinese economy influence other EM nations, but it can be a factor in the performance of developed economies too. This makes it important to keep up to date on news or announcements that could affect the Chinese economy.

Visit our economic calendar to discover the dates for Chinese macroeconomic data releases, like GDP and trade balances

¹ World Bank, 2018

² InterNations, 2018

³ IMF, 2019